August 14, 2001

Leave Those SUVs Alone

by Jerry Taylor

Jerry Taylor is Director of Natural Resources Studies at Cato Institute.

Although the late, great energy crisis seems to have come and gone, the political fight over yesterday's panic rages on. The big dust-up this fall will be over SUVs, light trucks, and minivans. Should the government order Detroit to make them get more miles per gallon? Conservationists say "yes." Economics 101 says "no."

Let's start with a simple question: Why should the government mandate conservation? When fuel becomes scarce, fuel prices go up. When fuel prices go up, people buy less fuel. Economists have discovered that, over the long run, a 20 percent increase in gasoline costs, for instance, will result in a 20 percent decline in gasoline consumption. No federal tax, mandate, or regulatory order is necessary.

Notice the phrase "over the long run." Energy markets are volatile because consumers do not change their buying habits much in the short run. That means that steep price hikes are necessary at the beginning of a spike just to reduce demand a little (and thus, to keep energy from temporarily running out in local markets). This has led some critics to conclude that people don't conserve enough when left to their own devices. They do, but consumers must be convinced that the price hikes are real and likely to linger before they'll invest in energy efficient products or adopt lifestyle changes.

But even in the short run, people respond. Last summer was a perfect example: For the first time in a non-recession year, gasoline sales declined in absolute terms in response to the $2.00/gallon that sold throughout much of the nation.

Mandated increases in the fuel efficiency of light trucks, moreover, won't save consumers money. A recent report from the National Academy of Sciences, for instance, notes that the fuel efficiency of a large pickup truck could be increased from 18.1 miles per gallon (the current fleet average) to 26.7 miles per gallon at a cost to automakers of $1,466. But do the math: It would take the average driver 14 years before he would save enough in gasoline costs to pay for the mandated up-front expenditure. A similar calculation for getting a large SUV up to 25.1 miles per gallon leads to a $1,348 expenditure and, similarly, more than a decade before buyers would break even.

"Fine with me," you say? But it's one thing to waste your own money on a poor investment; it's entirely another to force your neighbor to do so. You could take that $1,466, for instance, put it in a checking account yielding 5 percent interest, and make a heck of a lot more money than you could by investing it in automobile fuel efficiency. Any way you look at it, the fuel efficiency mandates on the table would cost car buyers thousands of dollars.

Even if government promotion of conservation were a worthwhile idea (say, as a way of reducing air pollution), a fuel efficiency mandate would be wrong. That's because increasing the mileage a vehicle gets from a gallon of gasoline reduces the cost of driving. The result? People drive more. Energy economists who've studied the relationship between automobile fuel efficiency standards and driving habits conclude that much of the projected fuel savings from such mandates are offset by increases in vehicle miles traveled. Make it cheaper for me to drive to the beach and I'll drive to the beach more frequently than I might have otherwise.

If we're determined to dramatically reduce gasoline consumption, the right way to go would be to increase the marginal costs of driving by increasing the tax on gasoline. Now, truth be told, I don't support this idea much either. A recent study by Harvard economist Kip Viscusi demonstrates that the massive fuel taxes already levied on drivers (about 40 cents per gallon) fully "internalize" the environmental damages caused by driving. But conservationists reject this approach for a different reason: Consumers hate gasoline taxes and no Congress or state legislature could possibly hike them.

But isn't it a bit underhanded to impose taxes through the back door (and make no mistake; fuel efficiency mandates increase the costs of vehicles and are therefore a tax) because tax hikes through the front door would spark a political riot? It's a sign of both political and intellectual weakness when conservationists are afraid to honestly discuss the implications of their ideas.

Look, it's a free country. If you want to buy a fuel-efficient car, knock yourself out. But using the brute force of government to punish consumers who don't share your taste in automobiles serves no economic or environmental purpose.

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